New Berkshire Hathaway Trade Idea as Warren Buffett Shares Succession Update

Everyone's (well, my) favorite American conglomerate, Berkshire Hathaway BRK.A BRK.B went to the tape with the firm's fourth quarter financial performance on Saturday. 

For the final three months of the past year, Berkshire generated an operating income of $14.527 billion, which was up 71% from the comparable year-ago period. This growth was led by an incredible 302% gain in insurance underwriting, which ran up to $3.409 billion, as insurance investment gained 50% to $4.088 billion.

It would seem the insurance business is carrying the firm at least of late. BNSF (the old Burlington Northern Santa Fe Railroad) suffered a 5.7% year-over-year sales contraction to $1.278 billion, as the Berkshire Hathaway Energy Company managed 15.3% growth to $729 million. All other controlled businesses pitched in revenue of $3.262 billion, which was down small from the year-ago period. Non-controlled businesses contributed revenue of $695 million, which was up 65%.

That's where the fun stops though. It's not like Berkshire's investments produced a contraction in value, but Q4 2023 was special, and the comparison was almost unfair. Investment gains slowed from $29.574 billion for the year-ago quarter to "just" $5.167 billion. This left GAAP net income attributable to Berkshire shareholders at $19.694 billion (-47.6%). Net earnings per "A" share worked out to $13,695 versus the year-ago comp of $26,043, while net earnings per "B" share came to $9.13 versus last year's $17.63.

Stunning Berkshire Headlines

The real headlines made over the weekend covered the growing size of Berkshire Hathaway's cash position, which is now a whopping $334.2 billion, up from $325.2 billion. Some see this as a reflection of the market's elevated overall valuation. It's been years now that the firm has carried a large cash balance as CEO Warren Buffett, a noted value investor, has not found anything he'd be comfortable plunking a huge chunk of change on.

I have to wonder if it is just more difficult for Buffett to seek and find opportunity without his long-time partner in business, Charlie Munger? On that note, the 94-year-old Buffett revealed in his annual letter that Berkshire had paid a whopping $26.8 billion in federal taxes to the IRS. According to the letter, that was about 5% of all corporate taxes paid by all companies in America. 

Buffett added that he firm also paid sizable sums in taxes to foreign governments and 44 of the 50 U.S. states.

Buffett did try to explain himself to investors in his annual letter: 

"Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won’t change. While our ownership in marketable equities moved downward last year from $354 billion to $272 billion, the value of our non-quoted controlled equities increased somewhat and remains far greater than the value of the marketable portfolio." 

The CEO then added: 

"Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities — mostly American equities, although many of these will have international operations of significance. Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned."

Warren Buffett Shares Sad Succession Note With Berkshire Hathaway Investors

On a sad note, sad for me as an investor in Berkshire Hathaway and as an investor who has long looked at Buffett the way a minor league ballplayer might look at Willie Mays, Buffett addressed the firm's succession. 

"At 94, it won’t be long before Greg Abel replaces me as CEO and will be writing the annual letters," he wrote. "Greg shares the Berkshire creed that a 'report' is what a Berkshire CEO annually owes to owners. And he also understands that if you start fooling your shareholders, you will soon believe your own baloney and be fooling yourself as well."

One of my mild "back of mind" fears is that once Buffett either retires or, for any reason, no longer serves the firm as chief executive, that there will be a "sell the stock" market reaction before Abel is given a proper chance to prove himself as a worthy steward of the firm's fortunes.

Berkshire Hathaway Stock Charts

Just as a reminder on why I have seemingly always maintained at least a small, long position in the Berkshire Hathaway "B" shares, which started trading back in 1996. This is a 16-year chart of the "Bs":

Incredibly, over the past year, the shares have broken out of a 15-year uptrend to the upside and haven't slowed down for anything other than sell-offs in 2020 (pandemic) and 2022 that turned out to be buying opportunities. Let's zoom in a bit, shall we?

Readers will see a rising-wedge pattern of bearish reversal that dates back to August as opposed to an ascending-triangle pattern, which would be a pattern of bullish continuance. That said, the wedge appears to be nowhere near closing and as we speak is trying to break out to the upside again, which would mean that the wedge has failed.

It's very likely that as the stock continues to make higher lows, the highs are slowing down a bit as markets anticipate succession. That may very well be an opportunity if and when it happens. We can't know. For now, the upside pivot is the November high of $491. Should these shares break the pattern, that would take the target price all the way up to $564.

For me, the add zone would be between the 21-day EMA and 50-day SMA as long as Buffett is running the show. That said, the 200-day SMA is not too far off to the downside, and that is where I start preserving capital.

At the time of publication, Guifoyle was long BRK.B equity.